Firmly Positive Report

Throughout the soar and plunge of month-to-month volatility, we have maintained our base case outlook for business spending that was established in our 2013 outlook in December. Our outlook suggested that business spending would get a slow start to the year before gradually gaining momentum in the second quarter. Today’s report fits into that outlook as it is the first firmly positive report this year that cannot be thrown away because of an isolated, one-off surge in a single component that is only likely to reverse the following month.
Some of the strength we see here in April may be temporary. For example, civilian aircraft orders were up 18.1 percent and defense aircraft orders surged 53.3 percent. But that was not the only driver of the increase. In fact, gains were remarkably broad based; every major industry sector was positive from primary and fabricated metals to computers and electronic equipment. 
Core capital goods orders increased 1.2 percent which was more than double consensus expectations. What is even more impressive is that the sequential gain here in April comes on the heels of a substantial upward revision to the previously reported gain in March. What had been reported as a 0.2 percent gain in core capital goods orders last month was revised to a 0.9 percent pick up. Some weakness in orders last autumn had worried us, but after several months of gradual recovery, today’s report shows a substantive move in the right direction. 

Any Bad News?

The only real troubling aspect of today’s durable goods report is the fact that core capital goods shipments fell 1.5 percent in April. This is the line that feeds into the GDP report for business spending. Since April is the first month of the second quarter, the implication here is that business spending is starting off the new quarter on the wrong foot. This would be more troubling if the pipeline for future shipments was drying up, but given the strength in orders for non-defense capital goods ex-aircraft, we are not terribly troubled. That is not to say that things are fine. It is clear to us that the contribution to overall economic growth from business fixed investment spending is not going to be what it was in 2010 and 2011. And we are not yet getting the green lights from the survey data. The ISM manufacturing index and the various regional PMIs are generally positive, though not at levels we would expect to see in order to be consistent with robust spending. In terms of total output, we have turned the corner from recovery to expansion. We still expect to see slow overall economic growth of roughly 1.5 to 2 percent this year and, while business spending will not be a drag on GDP growth, do not look for it to be the key driver of  expansion as it was early on in the recovery.